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The waiting game continues, but one of the big risk factors was taken off the table today. The German high court refused to grant the injunction to stop Germany's participation in the ESB (European Stability Mechanism). But, and that's a big "but", the court limited Germany's participation to 190 Euros without going back to the Bundestag (the equivalent of our House of Representatives) for approval. The ESM has not actually been formally approved by the Euro Zone countries, so any number of snags may appear in that process. Germany is the largest contributor to the ESM and many observers expect the required contributions to increase as the detailed plans are nailed down. So the European debt crisis is far from over, but the problem is sufficiently deferred for the markets to move on for now. The markets have a notoriously short attention span.
Next on the agenda is the FOMC announcement and news conference tomorrow. Personally, I think our biggest risk was passed by without any damage today (the German court decision). Depending on whom you speak with, some are claiming most traders and economists are expecting QE III is a "done deal"; others report just the opposite. That tells me that observers are split on whether QE III is needed or appropriate, so I don't expect a huge market move as a result of tomorrow's announcement. A great deal of the market's rise over the past several weeks is probably best attributed to Draghi's comments and anticipation of QE III, so we may well give back some of that if Bernanke delivers the usual message, "we stand ready to intervene if necessary..." But given today's gift of taking the European debt crisis off the radar temporarily, I don't expect a Bernanke disappointment to be devastating. On the other hand, the announcement of QE III could trigger a "sell the news" event.
SPX gained $3 to close at $1437 and RUT also gained $3 to close at $845. Trading volume dropped off a bit to 2.5 billion shares of the S&P 500, but remains above the 50 dma. Trading rose 6% on the NYSE and increased 5% on NASDAQ. The VIX dropped almost one percentage point to 15.8%.
My Sept condor position remains underwater at a P/L of -$3,940 with delta = -$93 and theta = +$418 (huge theta!). A big move up tomorrow could trigger closing the call spreads and lock in a loss for this position. The Oct condor stands at a P/L of -$810 with delta = -$62 and theta = +$79. The delta of our short calls is up to 21 so the pressure on the call spreads isn't too severe so far.
Get your popcorn ready for the show tomorrow.
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Ask any active trader this week what she is thinking and you will hear one or all three of the following: 1) AAPL's big show tomorrow, 2) the German court ruling tomorrow, and 3) Bernanke's announcement Thursday. But my sense is that the markets have decided that the German courts will approve the Euro Zone bailout and Bernanke will announce QE III. SPX gained $4 to close at $1434 and RUT gained $3 to close at $842. And this occurred on higher volume: 2.7 billion shares of the S&P 500 (50 dma = 2.4B). This appears to show traders taking bullish positions rather than taking their profits and hiding. If the German courts rule against the bailout, we could see a very ugly market to the downside tomorrow. I am inclined to think QE III is already baked into the current market levels, so if Bernanke continues to communicate the same message of the past few months (i.e., "we will act if necessary"), I doubt that will cause a huge downward move. In any case, the name of the game is waiting. VIX moved lower this morning, but then strengthened to close at 16.4% - hedging is the name of the game.
As mentioned earlier, we have the German court decision tomorrow, then unemployment claims, the PPI and Bernanke on Thursday. Friday brings the CPI and the consumer sentiment numbers. The next couple of days have the potential to be very volatile.
My Sept iron condor on RUT stands at a net P/L of - $3,300 with delta = -$30 and theta = +$298. Time decay is starting to help this position each day, but we are now sitting in a fairly narrow window of profitability. The October position stands at a P/L of -$170 with delta = -$45 and theta = +$70.
Now I will return to my "thinker" pose and wait...
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I admit to being surprised at the market's huge spurt upward yesterday, apparently on the back of Draghi's press conference in Europe. First of all, no one really thinks the European debt issues have been solved. Moreover, the German courts have not yet ruled on the constitutionality of the bailout funds. So declaring victory appears naive at best. Today this was followed with a weak jobs report with only 96k new jobs; analysts were expecting around 130k - 140k. But the market seemed to ignore the bad news. SPX gained $6 to close at $1438 while RUT closed at $842, up $4. Trading volume dropped a bit from yesterday with 2.7 billion shares of the S&P 500 stocks trading (still well above the 50 dma at 2.4B). Trading on the NYSE dropped 6% and trading volume decreased 9% on NASDAQ. Perhaps the poor jobs report has fueled hopes for Bernanke to come to the rescue next week.
I hedged my Sept condor yesterday morning and then repositioned both spreads in the afternoon. I hedged with the Oct 840 calls and then closed the 650/660 put spreads and rolled them to 790/800 and closed the 850/860 call spreads and rolled them up to 860/870. That position stands at a P/L of -$3,320 with delta = -$65 and theta = +$215. I hedged the Oct condor on RUT today with the Nov 880 call; that position stands at a P/L of -$350, with delta = -$48 and theta = +$70.
Shake off the last two days of tension and enjoy the weekend with your family. There will be plenty of time next week to fret about our trading.
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The markets shocked many traders last Thursday with that huge spurt upward based on what many would call vague promises by Draghi - it was the equivalent of, "Trust me. I'll fix it somehow." Perhaps even more of a surprise was the modest uptick Friday; I expected some profit taking after that strong rally. But today, traders found it hard to press the bullish case. The markets sluggishly trudged sideways most of the day and then weakened as we went into the final hours of trading. SPX lost $9 to close at $1429 while RUT lost $3 to close at $839. Trading volume fell off with 2.4 billion shares of the S&P 500 stocks trading; this is right at the 50 day moving average. Volume on the NYSE dropped 12% and trading on NASDAQ fell 9%. VIX increased nearly two points to 16.3%.
No economic news of any significance was released today. Everyone is focused on Wednesday's Fed announcement. Some analysts believe the markets have priced in the next round of quantitative easing, so an announcement of QE III may not greatly boost the markets - in fact, it could be a "sell the news"event. But what if Bernanke continues with the recent message of "we'll step in when we deem it necessary"? Will markets just wander sideways in disappointment or will that set off a profit taking selling spree? Bottom line: Wednesday could be a down market day whichever way Ben turns. We aren't likely to see much movement in the markets until the FOMC announcement.
My Sept iron condor on RUT is limping along with a P/L of -$3,810 with position delta = -$15 and position theta = +$323. Our adjustments have moved this position back to delta neutral and theta decay is starting to ramp up as expiration approaches. But this condor is in a precarious spot; in theory we could salvage a gain, but most likely we will be fighting to minimize the loss. The Oct condor position has also been hedged and stands at a P/L of -$260 with position delta = -$53 and position theta = +$70, so this condor is in pretty good shape.
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It seems as though much of the financial news for the past few months has been about the market waiting on something: FOMC meetings, ECB meetings, jobs reports, an announcement of QE III, etc. Now we are supposedly waiting on the ECB meeting tomorrow, but I doubt anything of substance can come of that until the German courts rule on the constitutionality of the bail-out funds. Then we will be waiting on the jobs report Friday; then we will wait on the FOMC meeting next week. Why do traders appear to be so indecisive and tentative? That's a tough question to answer, but here's my stab at it. I believe traders, regardless of their political stripes, realize this economy is in the toilet and isn't showing any signs of improving anytime soon. On the other hand, the large corporations that make up our stock market shed people several years ago when this economic spiral started; they have reduced their costs and continue to make reasonable profits, although revenue growth is hard to find. So there isn't a strong case to either buy or sell this market. Layer the election uncertainties on top of that and you have a lot of traders hiding under their desks. They alternate between fear of missing out on gains and fear of losing their clients' money. So many are jumping in and out of the market like the nervous chipmunks scurrying around my back yard. And many are simply sitting in cash, waiting for "normalcy" to return. But I think that is wishful thinking - we are in a "new normal".
SPX chopped sideways throughout the day, closing down $2 at $1403 and RUT lost $1 to close at $821. Trading volume was flat with 2.2 billion shares of the S&P 500 trading. Trading on the NYSE was up 4% and trading volume on NASDAQ was down 2%.
Tomorrow brings the ADP private payrolls number, which many will take as a precursor to Friday's non-farm payrolls report. Chances are these data will simply support the muddling along we have seen in recent months: not a disaster but certainly not evidence of a strong recovery either.
My Sept iron condor on RUT stands at a P/L of -$720 with position delta = -$148 and position theta = +$157. The October condor stands roughly at break-even with delta = -$52 and theta = +98. Non-directional trading looks pretty good in these choppy markets. So we wait on the other shoe to drop...
